Lincoln Electric Earnings Beat Drives Shares

Shares of Lincoln Electric Holdings Inc. (LECO) have gained 5% since it reported an 8% year-on-year improvement in its third-quarter 2013 adjusted earnings to 86 cents per share on Oct 31. Results also beat the Zacks Consensus Estimate of 84 cents. Despite a fall in revenues, continued focus on reducing costs and initiatives that enhance profitability drove the improved results.

Adjusted income excluded a net effect of 6 cents pertaining to rationalization and asset impairment charges and special items attributable to non-controlling interests. The year-ago quarter excluded special items rationalization and asset impairment charges, impact of the devaluation of the Venezuelan currency and special items attributable to non-controlling interests. Including these, reported earnings were 80 cents per share in the quarter versus 77 cents in the year-ago quarter.

Total revenue dropped 1% year over year to $692 million, missing the Zacks Consensus Estimate of $705 million. A 2.2% benefit from acquisitions was offset by 2.5% lower unit volumes and a slightly unfavorable impact from foreign currency translation.

Cost and Margins

Cost of goods sold declined 5% to $459 million in the quarter. Gross profit increased 9% to $233 million. Gross margin expanded 300 basis points (bps) year over year to 33.6% in the quarter aided by better sales mix, an improved price cost relationship and operational improvements.

Selling, general & administrative expenses increased 8% to $131 million from $121 million in the year-ago quarter due to incremental expenses from acquisitions and general increases in SG&A spending. Adjusted operating profit improved 11% to $101.5 million in the quarter. Adjusted operating margin inflated 150 bps to a record 14.7%.

Financial Position

As of Sep 30, 2013, cash and cash equivalents were $101.5 million versus $286 million as of Dec 31, 2012. Cash from operating activities was $155 million in the third quarter compared with $82 million in the prior-year quarter.

As of Sep 30, 2013, the debt-to-capitalization ratio was 1.1% compared with 1.5% as of Dec 31, 2012. The company spent $44 million for share repurchases in the quarter.

Dividend

Lincoln Electric paid dividends of $16 million in the quarter. A day before the earnings relase, Lincoln Electric’s board of directors had announced a 15% increase in quarterly cash dividend to 23 cents. The increased dividend is payable on Jan 15, 2014 to shareholders of record as of Dec 31, 2013.

Outlook

Lincoln Electric did not provide any specific guidance for 2013 or 2014, but hinted that top line performance will remain sluggish, given its end market exposure, ongoing economic policy uncertainty and global growth forecast. However, the company will continue to focus on initiatives that drive improved profitability and earnings performance.

Our View

Despite softer volumes as a result of softening demand in both domestic and international markets, Lincoln continues to effectively drive margins. This is possible through enhancing product mix, optimizing manufacturing footprint and focusing on cost.

Going forward, Lincoln Electric will benefit from its acquisition strategy, introduction of new products and long-term growth in its key global markets as well as recovery in the construction sector. However, we remain cautious due to weakness in Europe .Lincoln Electric currently carries a short-term Zacks Rank #3 (Hold).

Peer Performance

Stanley Black & Decker (SWK) reported earnings per share from continuing operations of $1.39 in the third quarter of 2013, up from $1.22 reported in the year-ago quarter and a cent above the Zacks Consensus Estimate of $1.38.

Illinois Tool Works Inc. (ITW) reported adjusted earnings per share from continuing operations of 99 cents in the third quarter of 2013, up 11.2% year over year from 89 cents reported in the year-ago quarter. The result, however, was 9.2% below the Zacks Consensus Estimate of $1.09.

Kennametal Inc.’s (KMT) adjusted earnings per share of 53 cents were below 57 cents earnings reported in the year-ago quarter and also lagged the Zacks Consensus Estimate of 55 cents.